Leasing can off er fl eets numerous advantages, including better cash fl ow, fewer administrative

headaches, and a better public image.

TAKING THE PLUNGE: WHY YOUR FLEET

SHOULD LEASE

Taking the Plunge: Why Your Fleet Should Lease

2

For the majority of companies, managing a fl eet program that provides drivers with a work vehicle is less expensive than reimbursing individual employees the costs associated with driving their own vehicles. Commercial fl eet vehicles are acquired at a cost far lower than the retail price an individual would pay for the same vehicle; plus, companies can take advantage of the manufacturer’s fl eet incentives and allowances. Companies also get excellent fi nancing from vehicle lessors or sellers that is far better than what an individual could arrange on his or her own.

Logistically, a commercial fl eet is easier to manage with one payment to a leasing company or loan issuer rather than processing numerous expense reports. Fleet management personnel tend to make better vehicle-related choices than individual drivers do. Additionally, fl eet managers can calculate the most cost-eff ective replacement cycling of vehicles, ensure correct vehicle specifi cations are met, expedite and oversee vehicle maintenance, pursue accident reimbursement, liaise in auto-accident litigation, audit or pursue warranty reimbursements and manufacturer or lessor rebates, ensure fl eet reporting is consistent and in compliance with applicable tax laws, and more.

The practical and logistical advantages of running a fl eet program are well established, but there is one question that fl eet managers continue to weigh — leasing vs. owning the company’s vehicles. While there are some reasons why fl eets may want to own their vehicles, leasing is the smarter choice in many cases, and should be closely considered.

WHY LEASING CAN MAKE GOOD FINANCIAL SENSE FOR A FLEETWhile owning fl eet vehicles off ers a business some advantages, leasing vehicles can provide cash-fl ow benefi ts, reduce administrative headaches, make available a variety of fl eet-management tools, and off er tax savings. Additionally, contracts known as “value leases” off er an option for further fi nancial benefi ts.

Improved Cash Flow. The most signifi cant benefi t of fl eet vehicle leasing is greater corporate cash fl ow. A smaller up-front investment is required for a lease than for an outright purchase. A well-written lease agreement reduces and consolidates fl eet costs to a monthly operating expense, while keeping credit lines clear and cash on hand to reinvest in the company. Cash that would have been committed to fl eet purchases can be used to grow the core business.

While there are some reasons why fl eets

may want to own their vehicles, leasing is the

smarter choice in many cases, and should be

closely considered.

Taking the Plunge: Why Your Fleet Should Lease

3

Companies that choose to own their vehicles, on the other hand, must either use their own capital or take out a loan: each requires signifi cant up-front investment. In

addition, the company balance sheet takes a hit in the form of reduced cash on hand or greater debt. This fi nancial position, in turn, can make the company

less attractive to investors or lenders, potentially thwarting plans to grow corporate business.

Reduced Administrative Burden. Beyond cash-fl ow and balance-sheet considerations, a commercial vehicle lease can save money in other ways, including by eliminating some administrative tasks. Whereas a vehicle

titleholder must handle everything from taxes owed to license renewals, a lease provider typically handles a

variety of fl eet-management tasks for its lessees, including paperwork and recordkeeping relating to acquisition, titling, and

remarketing, allowing the company’s fl eet manager to concentrate on core fl eet operations.

Many fl eet-lease providers also off er routine maintenance and roadside assistance programs. These services can be readily included in a fl at monthly fee, allowing company fl eet management to build the cost into an operations expense budget.

Companies that own their fl eet vehicles can outsource administrative and maintenance services; however, lease providers typically leverage relationships with service providers to negotiate reduced rates the user can enjoy.

Tools for Expense Management. Fleet-lease providers also off er a number of expense-management tools. These can include online tools for tracking a fl eet’s costs, history, and lease terms, as well as other important and necessary data. With these tools, fl eet management has become much less time-consuming overall, resulting in reduced costs. By monitoring expenses closely and accurately, problems can be identifi ed and dealt with immediately.

Many fl eet-lease providers also off er

fuel programs that help control spending at the

pump through regular odometer updates

and other tools.

LEASES 101 Commercial vehicle leases are off ered in two diff erent types: open-end and closed-end.

Open-end leases are generally shorter in term, lasting one year at minimum and continuing on a month-to-month basis thereafter. Open-end leases avoid long contracts but usually present an amount of lease-end fi nancial risk. Most open-end leases contain a terminal rental adjustment clause (TRAC). A TRAC guarantees the vehicle owner (the leasing provider) a predetermined value for the vehicle upon sale at lease end. If the selling price is more than this value, the lessee is credited the surplus. If the vehicle is sold for less, the lessee is responsible for paying the diff erence.

Closed-end leases, also known as “walk away leases,” generally run longer term (typically about three years), but carry no risk at lease end. In a closed-end lease, the lease provider bears 100% of the responsibility for the vehicle at lease end. A closed-end lease may be slightly more expensive in month-to-month costs, and most are subject to mileage restrictions and “wear-and-tear” provisions. However, costs are fi xed.

The lease terms for each of these lease types will impact the ultimate net cost of the lease.

Taking the Plunge: Why Your Fleet Should Lease

4

Telematics not only can monitor and measure

driver behavior, but can help predict which

drivers are most likely to be in a crash.

Many fl eet-lease providers also off er fuel programs that help control spending at the pump through regular odometer updates and other tools. Fuel programs also often provide preventive maintenance scheduling and fl eet cycling, which can help control fl eet costs over the longer term.

“Value Leasing” for Further Cost Savings. Fleets may choose to take advantage of “value leasing” programs. These programs off er late-model vehicles that typically look and perform like new, yet can save up to $100 per vehicle, per month, depending on vehicle type and the terms of the lease. For many of these vehicles, original manufacturer’s warranty coverage remains.

Unique Tax Advantages. Corporate vehicle leasing comes with associated tax benefi ts, which vary according to lease type and state. In the old leasing environment, a capital lease would be added to a company’s balance sheet while an operating lease could be kept off of it; however, as of February 2016, when the Financial Accounting Standards Board released new guidelines for lease accounting, companies that lease vehicles are required to include the leases on their balance sheets, but won’t have the leases counted as debt.

In a capital lease, the lessee is considered the vehicle owner for tax purposes. By assuming some risks of ownership, a lessee can claim depreciation on the asset each year and deduct the interest expense of the fl eet-lease payments.

And fi nally, depending on the state, leasing can provide all of the benefi ts of owning fl eet vehicles plus the cash-fl ow benefi t of paying rental tax over time versus up-front sales tax in rental-tax states. The majority of states — about two-thirds of them — are rental-tax states. Leasing can therefore have a positive net present value [see “Understanding Net Present Value” sidebar], unlike up-front purchases, when discounting at a company’s true opportunity cost of capital.

UNDERSTANDING NET PRESENT VALUE When determining whether to buy or lease a fl eet of vehicles, companies should take into consideration the concept of net present value. Due to infl ation, a dollar spent (or received) today is worth more than a dollar spent or received in the future. The process of determining what that value will be is called net present value.

The cost of a fl eet vehicle produces a fl ow of funds from the fi rst day of lease until the vehicle is sold. These fl ows comprise several components, such as lease payments or initial purchase costs (outfl ows), and tax deductions/credits and resale proceeds (infl ows). These fl ows occur over a period of time, and when a company analyzes the lease-versus-buy numbers, what is being analyzed is the net present value of the after-tax funds fl ow.

If the fl eet is leased using the typical open-end terminal rental adjustment clause (TRAC) lease, the fl ows consist of a series of lease payments, which are partially off set by their deductibility for tax purposes, with a fi nal fl ow of the TRAC adjustment, which can be either an infl ow or outfl ow, depending on the net of the proceeds against the unamortized book value.

For an owned fl eet, the fl ows are diff erent: There is a one-time outfl ow of the purchase price, followed by the tax depreciation benefi t, ending with the resale proceeds and “recapture” of any tax benefi t taken due to the tax code.

Taking the Plunge: Why Your Fleet Should Lease

5

More Than Money. Of course, there is more to a fl eet operation, and thus more to the lease-versus-buy decision, than simple fi nancial considerations. Fleet managers have a broad range of responsibilities beyond the cost and method of procurement of the vehicles they manage, including:• Ensuring that vehicles are as safe as possible and that company drivers perform their

jobs as safely as possible.• Providing for, and managing, the regular preventive maintenance of those vehicles.• Managing the purchase of tires and other repairs, both predictable and unexpected.• Overseeing the processes for drivers to report accidents, obtaining replacement

transportation, managing and authorizing the repair, and authorizing subrogation recovery where possible.

• Arranging for the means by which drivers can buy fuel, and managing the resulting costs of that fuel, all the while tracking the fuel effi ciency of the vehicles they drive.

• Having a process in place for vehicle administrative needs, such as license renewals and the payment of parking tickets.

There are more examples, but the picture is clear: With internal resources and staffi ng limited, a fl eet manager’s responsibilities require suppliers who can act as the fl eet department “back room,” while the fl eet manager directs fl eet performance and retains overall authority. To that end, fl eet lessors off er what is called a “bundled” program — that is, with a master lease agreement, they can tie any or all of the previously mentioned fl eet programs (e.g., maintenance and accident management, safety, fuel cards) into a single source. It is also possible for a company to opt to buy vehicles, and this can be done via afl eet-management company as well, using the bundled approach.

Finally, a less-tangible benefi t to commercial vehicle leasing is the ability to keep a modern, reliable, and better-looking fl eet on the road. Sometimes overlooked is the public perception created by a fl eet vehicle as a representation of the company itself. A fl eet comprising vehicles of varying quality, age, and appearance can send an undesirable message to existing and potential customers.

ANALYZING OWNING VERSUS LEASINGChoosing between owning and leasing a vehicle fl eet can be tough. For fl eets that have traditionally owned their vehicles, for instance, switching to leasing can seem like a daunting step. With the correct preparation and by asking the right questions, however, performing a lease-versus-buy analysis can be a fairly straightforward process for any company.

Getting Started. Before any buy-versus-lease data is gathered, it is important to understand the reason for undertaking the analysis in the fi rst place. Why now? What has or hasn’t changed since an analysis was last conducted? Is this the fi rst time an analysis was undertaken? Who is requesting that it be done?

Some companies schedule the lease-versus-buy analysis each year. Some do so whenever any current procurement contract is up for renewal; and still others analyze buy versus lease when there is a change in senior management. A company’s fl eet manager should know whether the current analysis is part of a standard, regularly scheduled review or a reaction to some change somewhere in the company. The reason for the analysis may have an impact on the ultimate decision.

AF0

4-06

91.1

7top

Taking the Plunge: Why Your Fleet Should Lease

6

To Lease or Not. There are a number of considerations to evaluate when deciding whether to choose an ownership or a leasing model for a company’s fl eet. These include vehicle cycling time and the importance of cash fl ow for the business.

Top of mind is the company’s overall goals and culture. For example, if a company currently owns but would like more fl exibility in when to replace vehicles and how many to replace, leasing provides that fl exibility. Similarly, if robust cash fl ow is the goal for the business, leasing will help achieve that aim.

Vehicle Cycling Time. Cycling time is a major consideration when evaluating the pros and cons of leasing. If a company cycles through its vehicles every four years or sooner, leasing is probably the best choice, whereas infrequently used vehicles and specialty-use vehicles with a limited resale market might be better candidates for purchase.

Cash Flow. If the company is looking for predictable, even cash fl ows, leasing fi ts the bill. Some open-end TRAC leases have payments in annual increments; however, closed-end leases are even better for cash-fl ow planning purposes, with equal payments

for the entire lease term [see “Leases 101” sidebar]. Ownership has very diff erent funds fl ows, but if cash fl ows aren’t an issue for a company, and the net present value is stronger, buying can work well.

YOU’VE DECIDED TO LEASE. NOW WHAT?Once a fl eet manager and other key personnel have determined leasing is the best option, they will need to establish the goal of the leasing program. They should ask themselves, “What is our defi nition of success for the lease? What is the business issue that we need to solve?”

Knowing the answers to these questions will help companies evaluate lessor bids objectively, choose a lessor wisely, select the best type of lease to meet their goals, and, therefore, create the best outcome for the company.